Rate hike: Well done

RBI will have to prevent a liquidity squeeze, but it should do so without straying too far from its inflation-targeting mandate

RBI’s monetary policy committee has done well to increase policy interest rates for the first time since January 2014. Photo: Abhijit Bhatlekar/Mint

The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) has done well to increase policy interest rates for the first time since January 2014. Mint had argued for a pre-emptive strike against resurgent inflation in its Monday editorial. It is significant that all six MPC members voted for a rate hike, a far cry from the view in the markets that it would be a close call either way.

Every inflation indicator—the headline number, core inflation, inflation expectations and input costs—has been flashing amber. The most worrisome fact is that core inflation has been running ahead of headline inflation. This suggests that price pressures are no longer restricted to food items, fuel or even the temporary impact of higher house rent allowance for government employees.

Meanwhile, RBI will have to prevent a liquidity squeeze, but it should do so without straying too far from its inflation-targeting mandate. It should thus conduct open market operations so that call money rates remain close to the repo rate, rather than being distracted by the losses in bond portfolios.